In our business borrowing money is essential to our success – unless of course you are a lottery winner.
Quite often we only need to borrow money for a short period of time to enable us to purchase a property, renovate it and then sell it on. This might seem simple enough and with a good business plan you might imagine that it would be an easy enough request to sell to your lender, however with the new mortgage requirements recently implemented people are finding it harder and harder to find short term loan options.
Firstly it’s important to know the correct terminology for this type of borrowing. What you need to request is a bridging loan which is designed to be leant for a period of 12 months or less and is usually offered by specialist loan companies – this is why you won’t see it advertised on the front page of your bank’s website.
Due to the nature of the borrowing (which is seen as unusual to most people who want a 25 year mortgage to buy property) you will find that these specialist lenders quite often prefer to deal only with brokers and so you may need to engage with one to be able to access your preferred lender. The downside of this is that you will have to pay a brokerage fee (unless this is covered by the lender) however you will benefit from the experience of the broker who will be able to advise you on the best product for your needs. When you have a load of other property related business to attend to you might find that working with a broker is actually really helpful.
As a rule short terms loans are not cheap. If the lender is to get a worthwhile return on their investment they are going to need to whack the interest rate up and so it’s important that you work these calculations into your budget if you want to stay on track and make a profit. With renovations it’s easy to see your budget run away from you when unexpected issues arise – don’t let the interest on your loan be one of them. Don’t be surprised if you find that the LTV (loan to value) rate is somewhere around 4 times that of an ordinary mortgage rate. Yes it stings but if you’ve done your sums right you should still be able to enjoy a healthy pay day after your flip.
You will find here a full list of lenders who are members of the short terms lenders association and this is a great resource in you’re in search for a bridging loan.
Other alternatives if you would prefer to skip the high interest fees are to remortgage another property, take out a higher loan on the property at purchase to cover the cost of renovation or seek funds from a private investor. This type of lender is known as an “angel” and they are usually wealthy people who have funds to spare and are looking for a quick return.
The way they work is that you would present your plan for the renovation to said investor and offer them a chance to supply funds to enable to project to go ahead. You will agree at the outset a level of return – usually original investment plus x% on top – and you will need to pay this back to them within the timeframe given regardless of how the investment has performed for you.
This can be risky if you have done your sums wrong and do not make as much money as you had planned, worse if the property fails to sell, however if you have confidence in your plan and know that you can perform as proposed, this is a great way to secure the money you need.
Do you have any other tips for short term lending? Please let us know in the comments below.